I am getting a refund, but owe an underpayment penalty. Does the IRS take that penalty out of my refund?

[JohnW15]

If you do owe an underpayment penalty, the IRS will reduce your refund by the penalty amount.

[Jordan3]

I got both an underpayment penalty and a refund for 2019 - how does that work? If I get a refund, doesn't that mean I overpaid? And if I overpaid, how did I get myself into an underpayment penalty situation?

[DavidS127]

You can get an underpayment penalty if you owe a lot of taxes, but didn't pay them until the end of the year.  The IRS rule is that tax should be paid as the income is earned.  So, if you made a lot of money in the first part of 2019, but didn't pay any taxes to the IRS until the last part of 2019, you can have a refund but still owe an underpayment penalty.

Note that the IRS has several "tests" that can help avoid an underpayment penalty, based on what you paid for 2018 taxes, and what and when you paid for 2019 taxes.  For example, if most of your income was in the last part of 2019, you may be able to calculate your penalty using the "annualized" method and avoid or reduce the penalty.

So, it is very important to answer all the questions in the underpayment penalty section of TurboTax.  To find the underpayment penalty section, click the "magnifying glass Search" icon on the top row, enter "underpayment penalty" in the search window and press return or enter, and then click on the "Jump to underpayment penalty" link to get the section where you can answer all the underpayment penalty questions.